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2018 (6) TMI 495 - AT - Income TaxTPA - comparable selection - Whether turnover filter is to be applied or not - Held that - turnover filter is one of the essential filter in order to select comparables when acted in same atmosphere - thus we do not find any error in the order of the ld.CIT(A) on adoption of turnover filter - hence grounds of appeal raised by the Revenue is rejected. Assessee is engaged in the business of manufacture of bulk drugs - Sales of Welcure Drug 23 crores. Thus it falls in the criteria of consideration and ought to be included in the list of comparable. Once it is included in the list of comparable then the profit level indicator would be (-) 3.69% and no adjustment would be required in the value of international transaction as per section 92(3) of the Act because it will go to reduce the value of the international transaction as declared by the assessee. Considering this aspect we allow appeal of the assessee and delete adjustment made in the value of international transactions. Addition on account of inflation of purchase of raw-material- Held that - To the show cause assessee explained reasons for the variations in the consumption of the raw material as also extent of and how the variations arisen. As decided in assessee s own case 2015 (9) TMI 325 - ITAT AHMEDABAD such addition to be deleted.
Issues Involved:
1. Determination of arm's length price (ALP) of international transactions. 2. Adjustment of ALP recommended by the Transfer Pricing Officer (TPO). 3. Application of turnover filter in selecting comparables. 4. Deletion of additions on account of inflation of purchase of raw materials. Detailed Analysis: 1. Determination of Arm's Length Price (ALP) of International Transactions: The primary issue in the cross-appeals by the Revenue and the assessee pertains to the determination of the arm's length price (ALP) of international transactions entered by the assessee with its associated enterprises (AE). The assessee used the Transactional Net Margin Method (TNMM) to determine the ALP, which was accepted by the TPO, including the selection of Schutz Dishman Biotech Ltd. as the tested party and the profit level indicator (PLI) of operative profit divided by operative cost (OP/OC). 2. Adjustment of ALP Recommended by the TPO: The TPO recommended an upward adjustment of ?4,10,40,877/- in the value of international transactions undertaken by the assessee. This recommendation was based on the selection of four comparables engaged in bulk drug manufacturing. The CIT(A) reduced the adjustment to ?2,83,07,144/- by applying a turnover filter, which eliminated three of the four comparables selected by the TPO. 3. Application of Turnover Filter in Selecting Comparables: The CIT(A) observed that a turnover filter is essential, and companies with sales in the range of ?8 crores to ?23 crores should be considered for comparison. This filter left only Gennex Laboratories Ltd. as a comparable. The Revenue contested this reduction, arguing against the application of the turnover filter. However, the Tribunal upheld the CIT(A)'s application of the turnover filter, citing decisions from the Bombay and Delhi High Courts that support the relevance of turnover in comparability analysis. 4. Deletion of Additions on Account of Inflation of Purchase of Raw Materials: The AO made additions of ?1,43,79,263/- and ?62,63,591/- on account of variations in the actual consumption of raw material compared to standard norms. The CIT(A) deleted these additions, following the Tribunal's orders for previous assessment years (2002-03 to 2006-07), which had similarly deleted such additions. The Tribunal upheld the CIT(A)'s decision, finding no error in the deletion of these additions based on consistent past rulings. Conclusion: The Tribunal concluded by rejecting the grounds of appeal raised by the Revenue regarding the application of the turnover filter and the adjustments confirmed by the CIT(A). The Tribunal allowed the appeal of the assessee by deleting the adjustment made in the value of international transactions and upheld the deletion of additions on account of inflation of purchase of raw materials. Thus, the appeal of the assessee was partly allowed, and the appeal of the Revenue was dismissed.
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